Do rate hikes call for a change in investment strategy?

Do rate hikes call for a change in investment strategy?

Buying stocks when they seem cheap in the hope that they will be worth more later may seem like one of the most basic investment principles.

However, this strategy, known as value investing, is not the only way to earn money – and for some years it is certainly not the most successful.

Since the financial crisis, fund managers who have opted instead for a growth strategy – looking for companies with fast-growing revenues, earnings, margins, or anything, regardless of cost – have outperformed.

Since the financial crisis, fund managers who favored a growth strategy have outperformed

Since the financial crisis, fund managers who favored a growth strategy have outperformed

Since the financial crisis, fund managers who favored a growth strategy have outperformed

Fund managers with growth traits, such as Nick Train of Lindsell Train and Terry Smith of Fundsmith, have attracted savers with their excellent results.

Anyone who has invested £ 1,000 in Train's Finsbury Growth & Income Trust in 2009 would now bet more than £ 5,000, while the average fund for equity funds in the UK has reached just under £ 3,000.

This could change, however. In recent years, British Value stocks, which include HSBC, BP ​​and Vodafone, according to MSCI UK Value Index, have outperformed their peers.

For savers, this could be the time to diversify beyond fund managers, who have performed well over the past decade, simply because they prefer a growth strategy.

If value-investing actually returns to favor, the managers who will excel in this new environment could be those whose performance has been somewhat weak in recent years.

Darius McDermott, Managing Director of fund research firm Chelsea Financial Services, explains that savers may find it difficult to distinguish between fund managers' strategies.

If you're looking to invest in value-based funds, which could develop well over the next few years, check out Schroder Income, Investec Global Special Situations and Jupiter UK Special Situations.

But why do value stocks start outperforming their peer group and will it stay that way? Niall O'Connor, Deputy Manager of the Brooks Macdonald Defensive Capital Fund, believes that the real reason for reviving value strategies is at the heart of monetary policy.

UK value stocks, which include HSBC, BP ​​and Vodafone, according to MSCI UK Value Index, outperform their growth peers.

UK value stocks, which include HSBC, BP ​​and Vodafone, according to MSCI UK Value Index, outperform their growth peers.

UK value stocks, which include HSBC, BP ​​and Vodafone, according to MSCI UK Value Index, outperform their growth peers.

"We have had a lot of quantitative easing since the financial crisis," he says.

Here, central banks such as the Bank of England are releasing more money into the economy by repurchasing "safe" assets such as government bonds from investors.

As a result, investors are being pushed into riskier assets such as equities and especially high growth companies.

Companies can afford to blow money to increase their size when interest rates are low and they can easily borrow and investors benefit from taking advantage of opportunities for these emerging companies.

O'Connor says, "There are electric scooter companies that are said to be worth billions of dollars. All they do is deliver electric scooters and provide an app.

"It's a great concept, but I just do not see the value in it," he warns. "Tesla has a higher value than General Motors and Ford. The products may be good, but the reviews are crazy. "

He believes that the golden age for this type of business could come to an end.

Now that quantitative easing is over and interest rates are rising, it is worth keeping cash in the bank.

Investors no longer have to resort to risky companies to earn their money. This means that the prices of the growth companies should fall.

O & # 39; Connor explains, "I do not have to invest in things like Tesla to get a return. Why should I want to take that risk if I can get risk-free money? "

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